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Ken Tumin founded the Bank Deals Blog in 2005 and has been passionately covering the best deposit deals ever since. He is frequently referenced by The New York Times, The Wall Street Journal, and other publications as a top expert, but he is first and foremost a fellow deal seeker and member of the wonderful community of savers that frequents DepositAccounts.

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Liquidation of a Virginia Credit Union Shows Risks of Small Credit Unions


Liquidation of a Virginia Credit Union Shows Risks of Small Credit Unions

Last Friday the NCUA liquidated another small credit union. It’s the sixth credit union liquidated this year, and all of these credit unions have been very small. This brings up an interesting question: should you trust a tiny credit union with a large deposit?

What is a tiny credit union? In the case of the credit union that was liquidated on Friday, it had $13 million in assets and 3 employees. Its name was Lynrocten Federal Credit Union, and it had one office located in Lynchburg, Virginia. This credit union was actually the largest credit union liquidated this year. The other five had sizes that ranged from $3.4 million in assets to $169,000 in assets.

Why would you want to join such a tiny credit union? Many of these liquidated credit unions had offered top rates. For example, Lynrocten FCU was offering a reward-type checking account with a 2.50% APY. These tiny credit unions aren’t easy to join due to their narrow fields of membership, but if you find a way to qualify, you may get some good deals. However, you’ll need to decide if you trust that credit union to hold your savings.

It should be noted that members who kept their balances under the NCUA coverage limits didn’t lose any of their deposits. In many of the credit union liquidations before this year, the NCUA often has found another credit union to assume members’ deposits. This is similar to what the FDIC has done for the vast majority of banks that have failed in the last five years. In these cases, there’s no loss on deposits, even deposits above the coverage limits. However, the six credit unions that have failed this year did not have another credit union to assume deposits (Correction: One credit union did get absorbed by another credit union five days after the liquidation.) So if any member had deposits over the NCUA coverage limits, those deposits may have been lost. In addition, the members had to wait before they received access to their deposits. The NCUA press releases didn’t provide the details about how long, but based on this sentence from the press releases, it is taking the NCUA a week just to contact the members:

NCUA’s Asset Management and Assistance Center will issue correspondence to individuals holding verified share accounts in the credit union within one week.

If you don’t want to go through this type of closure, you’ll want to be careful about the credit union you choose. You can review an institution’s financial health to see if it’s having financial problems that could result in a closure. For banks that have failed, almost everyone had poor financial ratings. In the case of DepositAccounts.com, this means one star (out of five). The credit unions that have failed have been more complicated.

For the case of the most recent failure, Lynrocten FCU had five stars from Bankrate.com, BauerFinancial and even from us at DepositAccounts.com. So why did the credit union fail? According to a Credit Union Times article on this liquidation:

Earlier in the week, local print and broadcast media reported that local police were investigating allegations from members that money was missing from accounts and loans were made from their accounts without their knowledge.

There may have been criminal activities at the credit union that caused the NCUA to liquidate it. This would explain why the credit union was liquidated when it had such healthy financial numbers.

Are small credit unions more likely to be closed due to criminal activities? When there are only three employees and only $13 million in assets, one employee can have a significant impact on the credit union. Also, it would seem like these small credit unions would have a more difficult time to ensure proper checks and balances. Small credit unions may not have the resources to hire experienced management who can develop processes and internal audits to ensure the credit union is operated in a safe and sound way.

So how big do you want your credit union or bank to be for you to feel that your deposits are safe? Are 10 employees enough? Or do you only care about NCUA or FDIC insurance?

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51hh   |     |   Comment #1
"For the case of the most recent failure, Lynrocten FCU had five stars from Bankrate.com, BauerFinancial and even from us at DepositAccounts.com."

This is alarming and causes all of us to have more scrutiny on small credit unions.  But criminal activities are simply non-detectable in advance.

I feel a 4-5 stars credit union with asset more than $200M is safe (relatively speaking) in my book. 
Shorebreak   |     |   Comment #2
As a report from the Credit Union National Association points out:

“As of third quarter 2011 banking institutions held over fourteen times more assets than credit unions ($13.8 trillion vs. $963 billion). Each of the nation’s four largest banking entities are larger than the entire credit union movement.”

Other stats from the report include:

The average banking institution is over fourteen times larger than the average credit union ($1.9 billion vs. $132 million in assets).

  • At third quarter 2011, half of all U.S. credit unions had less than $19 million in assets. Overall, less than 2% of banking institutions are this small.
  • Two-thirds of banking institutions had $100 million or more in total assets at third quarter 2011. Only 20% of credit unions are this large.

Thus, I probably wouldn't normally consider doing business with a credit union of asset size less than $100 million, regardless how good the institution's financial health rating.
Anonymous   |     |   Comment #3
So the moral of the story is, don't ever have more than $250,000 per person on deposit with any financial institution.  It seems like a liquidation could happen regardless of if it's a bank or credit union.  There have been some big banks with multiple branches which failed.  NOVA Bank is a perfect example of a liquidation with 13 branches and $432 million in deposits.

Personally, I think the risk is small, but it might be a good idea to have accounts with at least two different financial institutions just in case of a failure of one of them.
Wil   |     |   Comment #4
#3 is absolutely right. Just one addition: it's a good idea to have checking accounts with at least two different financial institutions, because if your remaining account(s) is(are) saving account(s), it may take time to fully access funds in a new checking account. Paying bills in the interim might then be difficult. Even if a savings account has a linked debit card, and many don't, there are some things you wouldn't want to pay with a debit card.
Shorebreak   |     |   Comment #5
I also agree with #3.
Given the threat of hacking and glitches in today's internet age it's only prudent to have a number of accounts to rely on for access to funds.
iforgotmyuseriduhoh   |     |   Comment #6
I would trust a small credit union with a large deposit -- AS LONG AS IT IS NCUA, *NOT* PRIVATE INSURANCE. As long as it's federally insured by the NCUA (like the FDIC, but for credit unions), and you've structured it properly so that your NCUA insurance is as high as your deposit (ie, PODs, etc) I have no problem with it.

I'm a survivor of two large banks going under (WAMU and Darby). Both were taken over by other institutions, but if they hadn't been, everything was properly insured by the FDIC. I like credit unions, and am a member of four of them (3 large ones, 1 very small one).
Keith Leggett
Keith Leggett   |     |   Comment #7

I.C.E. FCU, which was closed on March 15, was acquired by Kinecta FCU on March 20.  So, 5 out of the 6 failures involved insured depositor payouts. 

Anonymous   |     |   Comment #8
Just have 2 local banks or CUs and few Internet only for better rates and stay under $250K, problem solved and no worry ever.